Coverage Extensions to Enhance D&O Policies
While standard directors and officers (D&O) policies are designed to protect a wide array of risks, they have their limits. Coverage extensions are used to address these limits, fill gaps and provide organizations with additional protections outside the scope of traditional D&O agreements.
Coverage extensions solve a wide range of problems and can be continually improved to address the changing landscape of D&O liability. This Coverage Insights details a number of D&O extensions you should consider.
Advancement of Defence Costs
One extension that can prove invaluable in the event of a claim is the advancement of defence costs extension. In essence, this extension requires the insurer to forward defence costs to policyholders throughout a defined period of time.
Without this extension, an organization or its executives may be required to fund their own defence costs until an insurer can assess the claim and reimburse them. This is typically a time-consuming process and can take months or even years.
This extension is particularly important, as legal costs can get expensive, and most organizations lack the upfront resources to pay for such services. It should be noted that, if it is determined that a claim is not covered, the policyholder would be required to repay any defence cost advancements.
Retired Directors and Officers
Under many D&O policies, in order for an incident to be covered, organizations must have an active policy when a claim arises. Because some claims may take years to arise, a company’s retired executives can be left unexpectedly exposed. To make matters worse, retired directors and officers typically have no control over an organization’s insurance once they have left the organization. Accordingly, they cannot ensure their former organization will purchase the proper D&O insurance.
To remedy this issue, policyholders can protect their former directors and officers by including an extended reporting period in their D&O coverage. An extended reporting period allows organizations or retired executives to report a claim to the insurer even if the organization no longer carries an active policy.
In some cases, directors and officers serve on boards of outside organizations. This often occurs when an executive takes a leadership position for an external non-profit.
Standard D&O policies may not offer sufficient enough protection in these instances, and outside directorship coverage may be needed. This extension is particularly useful, as it ensures that executives will be covered in the event that their non-profit’s insurance is insufficient or completely exhausted.
When an organization purchases a new subsidiary, it is possible that the executives of these acquired operations could be open to D&O exposures.
The new subsidiaries extension is meant to address this concern, automatically covering any new subsidiaries and providing them with the same protection as the parent organization.
It should be noted that coverage only applies to claims that arise following the date of an acquisition. Automatic coverage may also be subject to the size of the acquired entity, and an endorsement may be required.
Spouses, Heirs and Legal Representatives
To protect themselves in the event of a claim, some executives transfer ownership of their assets to a third party. This often includes husbands, wives or guardians.
While this might be a sound legal strategy, it can also leave these third parties open to claims. The spouses, heirs and representatives extension is designed to protect third parties and the executive’s assets.
While this extension protects a third party from the actions of an executive, it does not protect them from the consequences of their own activities.
Other Common Extensions
In addition to the extensions above, there are a number of less common, but important, extensions to be aware of. The following are just some examples:
- Civil or bail bonds. This extension can help cover the cost of civil or bail bonds, allowing a director or officer to be released from custody.
- Public relations expenses. Following a D&O claim, companies may have to rebuild or protect their reputation. A public relations expenses extension covers the cost of engaging a public relations firm to improve public opinion.
- Deprivation of assets. This extension gives executives funds for housing, utilities and personal insurance services. This coverage is especially useful if an executive’s funds are frozen.
- Extradition costs. This extension covers the defence costs associated with opposing an extradition proceeding, including any bail process and subsequent trial.
- Joint ventures. This extension provides coverage for claims arising from joint venture operations.
For more information about these and other D&O extensions, contact your insurance broker.
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